If you’re an entrepreneur seeking funding for your company and you’ve gotten to the point of receiving a funding proposal from an investor, congratulations. Now that you’ve got it you may be asking yourself, “How do I analyze the proposal and negotiate?”
Here are some key considerations:
1. The most powerful negotiating tool is other investment proposals.
Outside of this there are other valid points for discussion that may lower the price of investment (the amount of stock you give up for a given amount of investment money). They generally center around investors’ assumptions versus your assumptions. You may want to consider:
2. The return on investment the investor expects
Is this realistic and in line with the rate generally accepted in your industry?
3. What is the investor’s valuation of your company at the time of exit?
How does this compare with your valuation? It’s safe to assume that your valuation will be higher. But is it higher by a few percentage points or a factor of 10x?
4. What did the investor use as a price to earnings ratio?
Did the investor choose the low end in a down market? Does the investor believe that the market will be down at the time of exit?
5. When did the investor assume the company will be acquired or go public?
Are these in lines with your expectations? Again, the investors assumption will be more conservative than yours but is it overly conservative?
6. Get a feel for the investor’s perception of downside risk and why they feel this way.
Is there something of which you are aware but the investor is not that may reduce this risk?
Obviously, to ask these questions and engage the investor in a reasonable and thoughtful dialog management must have conducted their own thorough analysis up front and have defendable arguments of their own.
Doing this will produce a more compelling offering and just may attract multiple investment proposals and give your company the most powerful negotiating tool of all, another offer.